Was selling your business always part of the plan?
Maybe you already own a successful business and you’re looking to merge and grow.
Business owners decide to buy and sell for a variety of reasons. Whatever the grounds for the big change, it can be a whirlwind of excitement, stress and confusion.
Going it alone and sourcing a buyer or seller directly suits some business owners but many find themselves lost, overwhelmed and confused.
Queue the role of the business broker. They promise to take all your pains away and make buying or selling a business easy. But do they?
What Is A Business Broker?
Business brokers, also called business transfer agents and intermediaries, act as the middlemen in the purchase and sale of private companies.
The role of the broker is to find a buyer and do some of the legwork and smooth the process. Most commonly, brokers are used by business owners to save time. But in reality, they only complete the equivalent of estate agents’ sales particulars, highlighting the best bits. Leaving the onus on the buyer to scratch beneath the surface for the balancing detail.
Some brokers specialise in certain industries or in businesses with specific characteristics and others are more general.
How Business Brokers Work
In whichever direction you’re looking, the transfer of ownership of a business is far from simple. Business brokers profess to manage the process through to completion, akin to estate agents in the housing market.
On taking on a new client, a business broker usually requires an upfront fee. All necessary information of the business in question (if selling) or the ideal purchase (if buying) is taken down, a prospectus is put together and the hunt starts for a route to sale.
The broker should advertise and promote your business for you.
The task list of the business broker includes sorting out all of the admin and paperwork of the purchase or sale and getting a good price for the seller.
Benefits Of Buying Or Selling Through A Broker
The first and most obvious advantage is the idea that someone else is going to do a lot of the work for you. Business owners are busy people as it is!
Opting for a broker purchase or sale also gives you the ability to move discreetly. Your details and situation are kept confidential at the outset, avoiding unnecessary rattling of your staff or supply chain.
Though all brokers should have a base knowledge, industry-specific brokers are more likely to really know their stuff. Their inside expertise means they’ll hold an accurate overview of most businesses in that sector and will know who is ready to sell or buy, and who to avoid.
Sector-specific brokers also tend to have a catalogue of existing businesses on standby, which can make for a quick and easy deal. They may have a buyer on the books ready and waiting, or a few businesses in mind for an acquirer.
What’s The Catch?
Business brokers don’t always hold a sparkling reputation, and the various barriers for both sellers and buyers are worth knowing about before engaging with one.
It’s important to remember that brokers ultimately work for the seller. This means that the top-level information they provide for businesses on their books can be manipulated to give a false impression. The buyer will still have to do some serious digging.
Brokers tend to encourage sellers to apply pressure in existing sale conversations by bragging about other reams of interest coming in. Simple, schoolyard tactics. As a buyer, the onus is on you to do due diligence and understand the financials of any potential acquisition.
Let’s take a look at a few other blockers.
1: Upfront Fees
Most business brokers require an upfront fee as a show of commitment to their services when selling your business through them.
As brokers are paid on commission, an upfront fee alone can remove the financial incentive behind getting you a good price, or even any active marketing. This can quite often lead to frustrated sellers who aren’t getting the interest they want or were promised.
In the event that there is a bite, the broker will often leave the seller and buyer to essentially do the deal themselves. Not quite what you were after, right?
2: Success Fees
Success fees are chargeable by many brokers on a sliding scale, usually 3%-10% of the final sale price, on successful sale of the business. The higher the business sells for, the more the broker agent gets paid.
On paper, this motivates a broker to achieve a great price. In reality, it’s not unusual for a broker to overinflate the value of a business to get the highest sale price possible. This often slows the sale considerably.
The acquisition of smaller businesses generally means a smaller upfront fee and larger success fee. Such associated fee requirements of broker deals mean that corporate firms and investment banks often aren’t suitable candidates.
3: Low Success Rate
The stats show that only 8% of businesses listed for sale actually sell each year.
8%! Unbelievable. You should definitely know that going in.
And on that note, take business brokers’ own published success rates with a pinch of salt. There is no way of verifying what they claim. Respected brokers get their reputation from being good at what they do, not from waving numbers in the air.
4: Barrier To Sellers
Brokers can be very awkward gatekeepers, which is a big put off. If you’re the seller, it might save you the trouble of dealing with a few time-wasters, but overall it wards off interested parties who simply need more information.
I’ve had plenty of experience with brokers imposing premature hurdles before letting me get in touch with a seller. Asking whether I’m able to raise suitable finance, for example, is completely irrelevant if I don’t know whether I’m interested or not! I had the money and the interest – but not the time to jump through all their hoops.
5: Strange Requirements (like a good faith deposit)
Some brokers may suggest unexpected requirements such as deposits to show ‘good faith’. This particular sort of deposit, often 5-10% of the purchase price and payable by the buyer once a suitable match has been found, is meant to be used towards the sale once all has gone smoothly.
These methods can be used to determine the experience of the buyer and are a completely unnecessary hassle. The broker’s job is certainly not to obstruct the sale.
Your Dream Deal Specification
Your dream deal specification, or your DDS, is the vision.
What do you actually want? Are you ready to sell or buy right this minute?
There are many factors to think over. Consider your ideal business size, location and sector when working out what sort of business you’d like to buy. If you’re selling, think time scale. And, of course, price!
Once you have defined your DDS, look for a broker specific to you. Call them up, talk about it and see what they have to say.
Business brokers may offer a variety of cross-sold services, such as helping sellers to invest the proceeds from a sale or assisting buyers in obtaining relevant finance. My advice to buyers or sellers is to identify specialists in the field and liaise directly with them.
Accountants and lawyers are your friends when looking to make a big business change. Close to their Business owner clients, they can be one of the first to know when an exit strategy or future acquisition is being sought.
Using a broker for buying or selling a business isn’t the easy ride it’s made out to be. Defining your DDS, and knowing how business brokers operate, gives you the tools to go in confidently and get what you want.
Or Cut Out The Middleman & Choose A Different Route
Did you know you don’t need to use a broker to buy or sell a business? There other routes to sale or purchase – and that’s where I can help you.
Buying and selling businesses can be stressful, but the support of someone who’s done it all before can make a world of difference to the outcome you get.
Over the years I have bought and sold numerous businesses. I know the ins and outs of the business buying world and I’m here to show you how you can cut our the middle man and make buying or selling your business easy and hassle free.
Don’t take the leap until you’ve heard the other options. Book a call and I’ll be happy to help.